Home Appreciation – Do You Really Understand the Power of Leverage?

  • Home
  • Home Appreciation – Do You Really Understand the Power of Leverage?

Time + Leverage + Compound Interest can make really, really rich.

These are 3 of some of the most powerful forces in the world, but people still underestimate them. It’s hard to grasp something growing exponentially over time.

It’s hard to grasp and understand the Time Value of Money for most people. That whole Get Rich slowly idea is basically another way of saying, “Just sit back and let time do it’s thing.”

Real estate allows you to use a ton of leverage to buy the biggest asset most people will ever buy. Moreover, it is basically programmed to keep increasing in cost – aka go up over time.

Look at this line chart of real estate prices over time. Beautiful.

The trend is your friend. Were there some ups and downs over the years? Sure, but over the long term, prices always go up.

Oh, and if you think that because home affordability is at an all time low and prices have to crash to restore balance, you don’t know the basic economics of supply and demand. Believe us or keep sitting on the sidelines telling everyone how you will buy when prices come down. Will you?

That said, interest rates will hopefully decrease eventually But then you’ll be competing with everyone else waiting for that to happen so prices will get bid back up again.

See why you can’t time the market? You’ll lose. The House Always Wins. See what we did there 😏

We’re not going to do the stereotypical “When is a good time to buy a house?” article. The answer is simple: You should’ve bought yesterday. Alternatively, buy when you have your personal finances in order. Don’t be house poor. Back to leverage.

Leverage can be dangerous. Buying individual stocks or crypto on leverage? Probably not a great idea for most people. Buying a house on leverage aka using a mortgage to put down 3.5%, 5%, 10 or 20%? Cheat code to build wealth.

Simple Math Example

Here’s a simple example for people who hate math:

Let’s say you buy a home for $500,000 and put down 3.5% using an FHA Loan. Here is some back of the envelope math to estimate what the next few years could look like for you.

You spent around $27,500 to buy this 500K home. That’s a lot of leverage.

Let’s say home prices don’t go crazy like they’ve done the past few years and they only go up around the national average of 4% a year. Sidebar, we hate using nationwide averages because real estate is hyper local and one hot zip code could appreciate by 10% while another part of the country could remain flat, but we digress.

In less than 2 years, you will double your money. Remember, you only put up $27,500 of your own money, and your equity after 2 years will be around $40,800. After 5 years it will be around $108,326 ($608,326-$500,000).

This doesn’t include the equity you’ve built up in the property over those years. To be fair, it’s not a lot if you don’t take advantage of the following…

How to Accelerate Wealth: Extra Payments, House Hacking, Tax Deductions, Foreced Appreciation

There are so many ways to juice your returns and make sure that you continue to build wealth and even accelerate it.

First, what about the naysayers who say that the interest will eat you alive.

First of all, mortgage interest is tax deductible so you will be saving a lot of money on your taxes – consult a profesional.

Secondly, if you can afford to make even 1 extra mortgage payment per year, you will save a ton of money on interest and pay off your home even faster.

Thirdly, and perhaps the most powerful trick, if you can house-hack, in other words rent out one room or 1 unit of your house or multifamily, you will build wealth much more quickly.

Credit: Apartmenttherapy.com

Imagine a mortgage being around $3800 in this example with a relatively high interest rate of 6.7%.

Now, imagine owning a duple and charging $2000 per month in rent to someone else to live in the other half of your duplex.

You can now either decide to use that money to pay the mortgage and save the rest OR overpay on your mortgage and gain equity even faster.

We won’t bore you with the math but you will come out ahead either way.

This is just the tip of the iceberg and a mortgage lender can go into far more detail with you but we wanted to provide a glimpse into the power of appreciation and leverage.

Nobody wants to be homeless. We need shelter and we’re going to have to pay for it.

The only question is whether you want to pay for it and build your own wealth, or somebody else’s.